Cemex SAB de CV (CX) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2005 CEMEX earnings conference call. My name is Alicia, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to introduce your host for today's call, Mr. Hector Medina, Executive Vice President of Planning and Finance. Please go ahead, sir.

Thank you. Good morning and thank you for joining us for the fourth-quarter conference call. I will briefly review our year-end results and will share with you our estimates for 2006. Then our CFO, Rodrigo Trevino, will follow with a discussion of our financial results.

The announcement of our 2005 fourth-quarter results marks a significant period for our Company, driven by international expansion and our global diversification strategy. Fifteen years ago, we began implementing our strategy as a single-market company, reporting sales of $1.3 billion and an EBITDA of $324 million.

Since 1990, we have seen our company grow into a leading multinational, with operations in more than 50 countries. During that period, operating cash flow and net sales have grown more than 10 times.

While we executed on our strategies, we also managed to strengthen our capital structure, which has given us the financial flexibility to continue on our high-growth path. During this period, we have proven that we can sustain profitability in even the most difficult economic environments. Our record of accomplishments shows the Company with a solid business and a financial strategy designed to provide sustained, profitable growth throughout the business cycles.

During 2005, an outstanding year for CEMEX, we achieved two very important milestones. First, we posted our strongest financial results ever. We achieved record EBITDA and free cash flow generation, surpassing the expectations we held a year ago.

For the year as a whole, EBITDA grew 40% to close on $3.6 billion. Net sales increased at the rate of 88%, reaching $15.3 billion. Our free cash flow grew at a rate of 36% to exceed $2 billion. This achievement comes primarily from the consolidation of the RMC operations for the period March through December and the related synergies, as well as from higher domestic volumes and prices in most of our markets and our portfolio.

Our second major milestone of the year was the undertaking and completion of the acquisition of the RMC Group on March 1. This has been not only the largest, but also our most complex acquisition to date, involving people from all of our operations in a multicountry and multidisciplinary effort.

The integration of this acquisition and the continuous improvement efforts are an ongoing and never-ending process. By 2007, we expect to capture in excess of $360 million in incremental EBITDA resulting from synergies.

We are convinced that the RMC acquisition, and in particular the experience, talent and energy of the employees who joined our Company early in this last year, makes CEMEX a better company today. We expect to grow EBITDA through positive price momentum in many of our markets and higher domestic volumes throughout the portfolio.

Additionally, we expect to capture the incremental $240 million of synergies throughout 2006. More than 80% of the PMI initiatives required to achieve the expected synergies have already been put in place. As a result of this underlying strength in our core markets, we are more confident today about our ability to deliver our EBITDA guidance of about $4 billion in 2006.

For this year, free cash flow after [managing] capital expenditures is expected to exceed 55% of our EBITDA, which was 60% in 2005. This demonstrates the strength of our asset portfolio, business model and earnings quality. The results I've just mentioned, as well as our confidence in the benefits of the RMC acquisition, leads us to approach 2006 with continued optimism and enthusiasm.

Now I would like to discuss the fourth-quarter performance of our principal markets and our outlook for these markets for 2006. In the United States, our cement volumes increased during the quarter by about 8% over the same quarter a year ago. On a like-to-like basis for the ongoing operations, volumes increased by 11% in the fourth quarter and 8% for the full year 2005.

Ready-mix volumes increased by 181% for the quarter and 177% for the full year due to the RMC acquisition. On a like-to-like basis, ready-mix volumes increased 6% for the quarter and for the year.

All segments of demand experienced robust growth throughout 2005, and the better-than-expected December weather led to strong volume growth for the quarter. Public sector construction spending put in place was up 8% for the first 11 months of 2005, with spending for streets and highways up 11%. Driving this factor in 2006 is the recently approved $287 billion, six-year surface transportation program known as [Safety Loop], coupled with the generally improving economic environment and fiscal condition of the states. Consequently, we see volumes in the public works and street and highway sectors increasing by about 7% during the year.

In the residential sector, construction spending was up 11% for the first 11 months of the year and housing starts were up by 6%. Growth in this sector was driven mainly by attractive financing terms, better employment, positive household formation, right inventories and continued migration flows stemming from Northern baby boomers. However, due to higher home prices and higher mortgage rates, we are cautiously stating a moderate decline in this sector of about 3% for 2006.

The industrial and commercial sector continues its growth trend, as demonstrated by a 7% increase in construction spending during the first 11 months of the year. On the back of continued economic expansion, we expect cement volume growth to reach about 9% in the segment. Accordingly, on a like-to-like basis, we expect cement volumes to grow in excess of 4% for the year. The probability of realizing most of the announced price increases is being enhanced by the continuing favorable supply/demand dynamics.

Finally, we are progressing with an integration of the U.S. portion of the RMC assets. As we discussed before, in the United States, we have identified around $90 million in recurrent cost savings, most of which will come from centralizing the management of functional areas, and we should fully realize these savings by 2007.

In Mexico, market conditions are improving, as demonstrated by a 5% increase in cement volumes during the fourth quarter, reversing a weak trend in the first nine months of the year. We ended the year with a 1% growth.

Ready-mix volumes grew by 15%, both for the quarter and the year, reflecting the continued strength in the infrastructure and formal construction sectors. We see three factors driving cement volumes during 2006.

The first is government spending on streets and highways, public buildings, hurricane reconstruction efforts and other infrastructure projects. The sector will be driven by strong government finances as the result of continued fiscal discipline and supported by higher realized [road] prices for the Mexican mix. Also, we see foreign direct investment and remittances from the United States, which in 2005 reached a record $20 million, remaining at the same high levels that we saw in 2005 and contributing to strong economic activity.

We anticipate GDP growth in Mexico of about 3.4% in 2006. As a result, we expect that cement consumption from government and other ready-mix-intensive projects will translate into an increasing of ready-mix volumes of 11% for the year. The outlook for the sector is supported by the expected distribution in the first quarter of 2006 of about $1 billion from the oil [surplus funds]. In fact, total expenditure in public works sector financed with federal funds is expected to reach at least $6 billion during 2006.

The second factor is low- and middle-income housing resulting from mortgage awards that have been increasing at an accelerated pace. The number of mortgages as sponsored by [Internet] and other institutions continues to grow and are expected to reach about 750,000 in 2006. Mortgages granted by commercial banks are expected to double to about 95,000, further supporting growth.

The third factor, albeit to a lesser extent than the others, is the sales construction sector, which is expected to increase moderately by about 1% for the year as a result of relatively stable real wages and employment. This sector is growing at a slower pace than GDP, however, because the higher availability of mortgage financing has enabled the formal construction segment to satisfy some of the housing demand.

Although we are optimistic about the strength in cement consumption, given the potential uncertainties resulting from our electoral cycle, we are cautiously estimating the growth in cement volumes of around 2% for the year.

As regarded restrictions on the exports of Mexican cement to the United States, we are pleased by the supplement that was announced last week. Under the terms of the agreement, those restrictions will be eased, and after a period of three years, eliminated.

During the transition period, the tariff will be lowered to $3 per metric ton from last year's level of 33. As part of the agreement, 3 million metric tons of Mexican cement will be allowed into the United States, of which we will be allowed to export around 2 million, or close to 700,000 tons above 2005 levels. In addition, we will receive approximately $100 million in cash and will eliminate about $65 million in liabilities.

In Spain, performance exceeded expectations, as cement volumes increased by 2% during the fourth quarter and by about 4% for the full year 2005. Both segments of demand remained strong throughout the year, driven by a robust construction segment. For 2006, we expect GDP will reflect the moderated growth and come in at about 3.2%.

Last year, the residential sector had its strongest year ever, with housing starts exceeding the 700,000 mark. For 2006, we expect the residential sector to decline slightly, although housing starts are expected to remain at high levels, underpinning robust cement consumption.

Public works sector performance is expected to remain flat throughout 2005. And at the national level, this sector is expected to improve after a transitional period in which some projects were put on hold as the new government settled in.

On the other hand, we see local municipalities moderating their public works activity throughout the year. Construction activity is also expected to be positively impacted by the electoral cycle, as several local elections will take place in 2007.

Public works demand will also be supported by the government's new infrastructure plan, which is expected to run through 2020, with an estimated total budget of $300 billion. The new program represents an annual increase of $4 billion, or more than 25% per annum, over the previous one. The industrial and commercial sector should remain stable throughout 2006. In light of the above, we estimate volume growth of about 1% for the year.

In the United Kingdom, cement volumes fell by 4% for the fourth quarter and by about 2% for the full year. The decrease in cement consumption was due mainly to a continued deceleration in the economy, as GDP growth for 2005 is expected to have been less than 2%, lower than the original forecast of between 3 and 3.5%. This resulted in a contraction of the construction output of about 1%, the first annual decline since 1994.

GDP in the United Kingdom is expected to grow at about 2% in 2006, with construction spending at about 1%, slightly below GDP growth. We see our volumes remaining roughly flat compared with those of last year.

We initially expect a continuation of the same trend we saw in the latter half of 2005, with activity levels slowly improving. The anticipated return to growth in the public and industrial and commercial sectors will partially offset the subdued activity in the repair, maintenance and improvement sector and the residential sector. We expect the weak trend to turn around during the second half of 2006.

The residential sector will not be very active due to higher interest rates and housing prices. Improvement in the public works sector will depend upon the government's returning to its previously announced investment in infrastructure, highway and other public building projects.

The continual efforts to increase and rationalize the productivity of our cement, ready mix and aggregate plans as part of our ongoing integration of the RMC operations. As a result, we expect to improve significantly our EBITDA in the UK by capturing the bulk of the expected synergies during 2006, despite weak market conditions. What's more, we are accomplishing this without compromising any of our market positions.

In France, our ready mix volumes increased by about 6% for the full year of 2005. This growth was mainly driven by the residential sector, which grew at about 10%, while the rest of the sectors grew roughly in line with GDP. For 2006, our ready mix volumes should grow roughly in line with GDP at about 1.5%. It is being driven primarily by a continuing robust housing sector. The numbers in this sector is expected to grow slightly, while public works sector is expected to remain flat for 2005.

In Germany, our domestic cement volumes dropped by 14%, while ready mix declined by 12% in 2005. We partially compensated for this negative result by increasing our exports by about 26%. These exports are aimed at improving our logistics by satisfying some of the demand throughout Europe that was previously served by other operations in our portfolio.

Domestic cement volumes in Germany are expected to remain flat year on year for 2006. In the housing sector, building permits have stabilized, and we now expect this sector to remain relatively flat throughout the year. The nonresidential sector is expected to remain flat as well.

Lastly, the public works sector is expected to slightly increase as a consequence of the beginning of a government-sponsored transportation infrastructure program.

In Venezuela, volume growth during 2005 was higher than expected at the beginning of the year, reaching 29%. All sectors showed improvement during the year, and increased [coal] revenues fueled infrastructure sector. Self-construction and government-sponsored housing were also important drivers of cement consumption.

For 2006, we expect cement consumption to continue its growth trend, albeit at a slower pace than last year. We expect cement volumes to grow in the mid-single-digit range.

In Colombia, we saw volume growth of 33% in 2005, driven primarily by the self-construction sector, which grew at about 40% during the year. Infrastructure spending was also a significant contributor to cement demand. For 2006, we expect the self-construction sector, which represents about 60% of total cement demand, to decline from the high level it reached last year. The formal and public works sectors, which represent the balance of cement construction, are expected to grow during the year. As a result of this, we expect our volumes to grow by about 3% during 2006.

Before I turn the call over to Rodrigo, I would like to make two important commitments to our shareholders during 2006. The first, which we made last year and reaffirm for 2006, is to achieve the effective and timely integration of RMC into CEMEX. We remain focused on realizing the synergies that we have identified and to [attain] as much value from this acquisition as we can. Toward this end, we remain committed to maximizing the synergies inherent in these acquisitions. We are on track to realize $360 million by 2007.

The second commitment is to ensure that in the short, medium and long term, our capital allocation strategy remains on course to sustain our track record of disciplined, profitable growth. Last year, we allocated most of our free cash flow to reduce net debt in order to achieve our steady-state target of 2.7 times, which we exceeded only seven months after we completed the acquisition of RMC, one full quarter ahead of schedule.

Going forward, we intend to invest our free cash flow in three ways. First, we intend to invest part of our free cash flow to increase our capacity of cement, ready-mix and aggregate in the markets that we currently serve. We do this in order to further integrate our position along the value chain and to ensure our ability to serve future growth in our markets.

Second, we continue to monitor cement markets and the entire value chain for investment opportunities outside of our current markets that would create even greater shareholder value and add to our organic growth trajectories.

Third, in the absence of acquisitions or investments that meet our strict criteria and our benchmark 10% return on capital employed, we will continue in our bias towards deleveraging.

Thank you for your time. I will now turn the call over to Rodrigo.

Thank you, Hector. Good morning, everyone, and thank you for joining us. We're pleased with our full-year performance, which comfortably exceeded the expectations we had a year ago and demonstrates that we can continue on our path of sustainable, profitable growth with a steady-state capital structure.

Our results were supported by higher volumes throughout our portfolio, as well as a significant improvement in supply/demand dynamics in many of our markets, both of which offset higher transportation and energy costs. We also benefited from the inclusion of the RMC operations beginning in March 2005.

In fact, EBITDA was up in our three core markets -- Mexico, the United States and Spain. These increases more than compensated for the weakness in other smaller markets. Our consolidated EBITDA margin went from 31% to 23%, due primarily to a change in the product mix resulting from the consolidation of RMC and the corresponding increase in the weight of lower-margin, less-capital-intensive businesses such as ready-mix.

The extraordinary increase in the depreciation and amortization expense in the fourth quarter versus previous quarters was due mainly to a one-time adjustment resulting from the incremental value of property, plant and equipment and intangible assets, other than goodwill, resulting from the fair value allocation of the purchase price paid for RMC, which was recently concluded.

We estimate that going forward, the quarter depreciation and amortization expense for the existing businesses will be normalized at about $275 million, versus the 394 million registered during the last quarter, including the one-time adjustments.

Our EBITDA for the quarter increased by 55% to $901 million. Although on a consolidated basis we met our full-year EBITDA guidance of close to 3.6 billion, we missed our EBITDA guidance for the fourth quarter. This was due mainly to the following three reasons.

First, we overestimated the speed of the price recovery in South Central America and the Caribbean region. Second, we failed to anticipate the full impact of seasonality in some of our European markets. And third, we had a variety of one-time extraordinary adjustments at the end of the year resulting from the first-year consolidation of RMC.

In the United States, a better pricing environment more than offset the impact of margins, given the shift into a lower capital-intensive business resulting from our integration of RMC. As a result, margins on sales increased by 1.5 percentage points.

Our EBITDA margin in Mexico decreased due to the greater weight of our ready-mix business as sales grew at a much faster rate than cement sales. In Spain, our EBITDA margin decreased slightly, again due to a product mix change and higher distribution costs.

Regarding energy costs, as you are aware, we have been proactive in our efforts to minimize our energy costs per ton of cement produced. These efforts have paid off. We have achieved greater stability with regard to our energy input costs in a global environment characterized by high volatility and rising costs of energy.

The increase in our energy costs during the quarter was in line with our full-year forecast. We expect that in 2006, our energy costs will increase by about 10% on average per metric ton of cement produced, or slightly more than $1 per metric ton of cement produced. This increase should be more than offset by the positive price momentum in most of our markets.

During 2005, our majority net income increased by 61% to $2.1 billion, due to our strong operating performance, the inclusion of RMC and gains resulting from our derivative positions, such as the early termination of our equity forwards during the third quarter.

For the quarter, majority net income decreased by 27%, due to a higher extraordinary depreciation and amortization expense, as has been previously explained, due to higher expenses below the operating line in connection with a change in the pension plans from defined benefit to defined contribution in Mexico, and expenses related to the consolidation of RMC.

The comparison versus 2004 also suffered from a $108 million extraordinary gain during that period, as we protected ourselves against the appreciation of the pound sterling in connection with a tender offer for the RMC Group.

On a consolidated basis, we achieved a return on capital employed of about 12% for 2005. This is in line with our returns prior to the RMC acquisition. What's more, we accomplished this without the bulk of the synergies, which we expect to realize this year.

For the full year 2005, free cash flow increased by 36% to slightly more than $2 billion, significantly exceeding our guidance. Our free cash flow for the quarter was 63% higher than during the same period in 2004. During the quarter, free cash flow of $325 million, plus $200 million in proceeds from the termination of the equity forwards, were used primarily to reduce net debt by 235 million and to prepay an equity forward contract to cover outstanding stock options for a total amount of $145 million.

The balance was used to fund several investments and for other liability management initiatives, such as prepayments of high coupon notes under various private placement programs that will reduce our interest expense going forward.

At the beginning of 2005, we committed to use most of our free cash flow to reduce debt. And we did. Since completing the acquisition of RMC on March 1, we have reduced our net debt by close to $1.8 billion by applying the majority of our free cash flow generated during this 10-month period to pay or prepay the most onerous debt on our balance sheet.

Looking at our capital structure, in 2005, we successfully refinanced $7.5 billion at an average all-in cost of less than LIBOR plus 40 basis points. We maintained our current ratings from S&P and Fitch, and also during 2005, Moody's gave CEMEX a credit rating upgrade.

The average maturity of our debt is now 3.4 years and our strong free cash flow on committed facilities in place means that we have no refinancing needs for debt maturing in 2006 or 2007. As of today, we have committed credit lines of more than $1 billion, which are sufficient for us to maintain our financial flexibility for unexpected needs.

Our interest coverage for the trailing 12 months through December increased to 6.8 times versus 6.5 times in September. We now expect our interest coverage to rapidly improve going forward, as we continue to use free cash flow to pay down debt and as we realize the benefits of liability management initiatives undertaken last year.

Our leverage ratio as measured by net debt to trailing 12 months pro forma EBITDA decreased from 3.2 times in March to 2.4 times in December. This ratio reflects the underlying strength of our operations, as well as our commitment to use most of our free cash flow to pay down debt until we recover our financial flexibility.

As Hector mentioned, we remain comfortable using free cash flow to pay down debt, even if this, again, takes us down to a net debt level of less than 2 times EBITDA in the near future.

During the year, we successfully completed a nondilutive equity offering in which 31 million ADSs were sold for a total amount of about $1.5 billion. We used $1.3 billion of the proceeds to unwind all equity forward contracts entered into with banks to hedge our executive stock option plans. This left us with unhedged options on about 6 million ADSs.

After considering our options, we decided to use a portion of the net proceeds from that equity offering to hedge our nondilutive options through a prepaid forward contract. The prepaid amount was $145 million, and due to the prepaid nature of this forward contract, the mark-to-market will always be positive during the life of the contract and should help us to meet most, if not all, of our continuing obligations under these programs.

Going forward, our first priority continues to be extracting the most value from the RMC acquisition. We remain committed to exceeding our 10% return on capital employed for the RMC portion of the business and we expect to achieve this during 2006.

Finally, and as always, I have been asked to remind you that any forward-looking statements we make today are based on our current knowledge of the markets in which we operating and could change in the future due to a variety of factors beyond our control.

Thank you for your attention, and now we will be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS). Christian Audi, Morgan Stanley.

I had a couple of questions -- a couple for Rodrigo, a couple for Hector. Rodrigo, can you just repeat the depreciation guidance that we should use, number one? And number two, could you just elaborate a little bit on the increase in other expense, part of which was this pension fund and the adjustment?

And then for Hector, you talked about capacity expansion. I was wondering if you know -- if you could give us a sense of where the bigger ones may occur globally? And in terms of pricing, if you could talk a little bit about pricing in Mexico, where it ended in '04, and what the guidance should be for '06? And also, in the U.S., can you give us a price point for the end of the quarter, and if you believe there is space for an additional price increase on the back of what you have mentioned in the past conference calls?

Let me take the first two questions. The depreciation and amortization charge that we would expect on a normalized basis for the existing businesses is something in the range of $275 million. During the fourth quarter, though, it was 394, so significantly higher than that, as a result of the one-time adjustment we have to make, given that we concluded the evaluation by third parties of how much of the purchase price of the RMC acquisition had to be allocated to property, plant and equipment.

Once that process has been concluded, we made the adjustment, we took the charge for the adjustment for the full year of 2005 during the fourth quarter of 2005. And the bottom line of this is that going forward, we would expect less volatility in our income statement going forward.

On the pension programs, in Mexico, we decided to change from a defined benefit program to a defined contribution program. The reason for this is two-fold. On the one hand, our pension programs in Mexico are overfunded. So this change will not require usage of free cash flow from operations to make the change. Second, what we do is we significantly reduce our contingent obligations, and gradually over time, we will eliminate the future contingent obligations on the current pension programs.

At the same time, we're also taking away volatility on our income statement. And so we think the change is good for the Company, is good for the employees and is one that we have seen in many other cases around the world -- companies moving to defined contribution from defined benefit plans.

The one-time charge on the income statement comes as a result of, given the fact that we're changing in the program, according to both U.S. and Mexican GAAP, we have to accelerate the recognition of the obligations that we were currently amortizing, also in accordance with Mexican and U.S. GAAP. Of course, this is a noncash charge, but one that will lead to greater stability in earnings and one that will significantly reduce our contingent obligations and gradually eliminate them over time. So we think it is a positive change for the Company.

And then, Rodrigo, of the total other expense, can you give us a sense of how much of it was related to this pension fund, of the total 281 million?

Well, the total charge for the switch from defined benefit to defined contribution is slightly under $100 million. So it is the most significant by far. And of course, the other big item is what we explained on the one-time adjustment for depreciation and amortization here in the quarter.

Thank you, Christian, and as for the first part of your question, which is capacity expansion, of course, we are reviewing all of our portfolios to assess where this would be profitable, that will create value where it's needed. And as the process continues for reviewing each of our operations and as each project has to be individually approved by our Board, as this happens, we will of course come to the public and announce whatever is approved.

What I can tell you is that of course we have many opportunities in the added portfolio of assets in, for example, Eastern Europe, provides opportunities for expansion that we feel are very interesting. And I should also point out that sometimes it's not necessarily pinned to capacity expansion, but sometimes it is driving capacity that in fact helps us in the logistics and makes our -- optimizes our [blinker] capacity and operating network.

As to pricing, taking Mexico first, as you know, we announced a 6% increase, mainly in bagged cement, towards the beginning of the year. And of course, this is too soon to tell how this is going to hold. But we are optimistic, given the good supply and demand conditions that we looked towards the end of last year. So that remains to be seen. But we certainly hold our policy of maintaining constant peso prices. And of course, dollar prices will depend on what the exchange rates are.

In terms of U.S. pricing, as we have already mentioned, there are price increases announced for January through March, depending on which region in different states, of $11 per metric ton, or $10 per short ton. And then there are additional increases announced for July of around $5 per short ton, which of course we will then see how they hold. But the general environment is very positive, as we see it today.

And Hector, can you just give us a sense of where prices are more or less in both markets at the end of the fourth quarter?

I'm sorry?

In cement.

Well, the average U.S. pricing level is around $96 per metric ton.

Gonzalo Fernandez.

I've got two questions. First, you have in other financial expenses a charge of 281 million in the quarter. I don't know if you can elaborate on how much is a one-time expense as related to the secondary offer and a little more of which addition of the expenses you have there.

And the second, Rodrigo explained that you overestimated the price recovery in South and Central America. I don't know if you can tell us which kind of price recovery were you expecting and what it was in fact? And what kind of price increases could we expect for 2006?

Let me take the price recovery issue first. What we had already mentioned is that in some of our markets, and I would say that it was specifically Colombia and the Dominican Republic, we were experiencing some competitive action in 2005, and that we expected some of that recovery to happen in the latter part of the year. It did not start to happen -- towards the very end of the year in Colombia -- hasn't happened yet in the Dominican Republic.

And so we would expect that to start happen. To which level, we are still -- early to tell. But we are very optimistic in the case of Colombia since prices have started to recover significantly. That is still happening as we speak. So we will be able to tell you more later on.

Rodrigo, you take up the --

Yes, the increased charges that you looked at, Gonzalo, in the fourth quarter, well, the biggest item, of course, is what I have explained of the change on the pension plans from defined benefits to defined contribution. That one-time charge is close to $100 million, slightly under $100 million. Now, the other big item -- which is, of course, a noncash item.

The other big item is the cost of prepaying the high coupon notes under private placing agreements as part of our liability management initiatives, which I explained will reduce our interest expense going forward as we are paying the most on our debt -- on our balance sheet. Of course, given the fact that these notes were at a high coupon, the cost of prepaying them over the face value of the notes is something slightly lower than $40 million in the aggregate for the prepayments as a whole. So those are the two big items.

Congratulations on the results for the year.

Steve Trent, Citigroup.

Just a quick question for you on the overall European operations. I realize it's scarcely the end of January here, but we are seeing a lot of media reports that the weather in lots of places in Europe has been very bad -- extremely cold, etc., kind of the flip opposite of what's going on here in the Northeast. Any kind of broad color on how you see the current weather conditions potentially impacting construction activity, especially in continental Europe?

Well, as you mentioned, Steve, the reports are not good. And we of course see them. But our people on the ground are feeling it. So yes, it is having some effect in some of our markets. Hopefully, this will go away and will be recovered in the remaining half of the year -- of the quarter. But, again, weather in Europe is sometimes wild. And we still have quite a few weeks to go in the quarter to recover.

Terrific. And just one more very quick question, and I'll let someone else speak. Any update at all as to what is going on with the Semen Gresik and how negotiations might be going with that one?

No news, Steve. We have continuous conversations with the Indonesian government, as we've mentioned. But nothing is new to that.

Mike Betts, JPMorgan.

Maybe I could start with a couple of questions back on the -- and apologies for this, but the missing of the EBITDA. And first one, those one-time adjustments on RMC, is it possible to give us some idea of roughly the 50 million, I suppose, how it splits between those items, and particularly those that we should regard as one-off and those that were just underestimated. That last one, the one-time adjustments on RMC, would that be 10, $20 million or more?

No, it is not the biggest item, clearly. And it's not only related to the RMC Group; it is also related to the fact, for example, that the performance of the Company significantly exceeded the original expectations. And so, for example, variable compensation for the Company as a whole worldwide will be significantly better for this year than the previous year.

But the more important effects were what we mentioned in order of importance, which is we underestimated the seasonality of some of the new markets we are in, and we overestimated the recovery in the prices in some of the markets in the South Central America and Caribbean regions.

So this is what led to the significant missing of our guidance during the fourth quarter. And of course, despite that, we feel comfortable that we met the guidance for the full year. And of course, we significantly exceeded the guidance for free cash flow and for capital structure in terms of levels of net debt to EBITDA, as well as interest coverage.

No, I understand that, and that's fine. But just one more on that seasonality, the underestimating -- was that because of bad weather, worse weather than normal in the fourth quarter, or was it just because, as you said, RMC had done so well and maybe you assumed that it would be less seasonal than in previous years?

I would say that it's more because this is the first time that we lived through the cycle. And so to be honest, it is difficult for us to forecast -- to estimate something that we have never lived through.

And I don't think you gave a number for RMC's contribution in the fourth quarter, which you've indicated for previous quarters, at least in general terms. From my calculations, it looks to have been about $200 million. Would that be reasonable, or am I way out?

We don't have that breakdown, and it is becoming increasingly difficult, Mike, to have it, because in many parts of our portfolio, the businesses are very well-integrated, for example, in the U.S., which is the biggest market or was the biggest market for the RMC Group. The operations of the legacy CEMEX, as well as the RMC Group, are now very well-integrated.

As well as in terms of back office -- there are some regional offices now that we could not allocate those expenses specifically to RMC. So as Rodrigo said, it is becoming increasingly difficult to pinpoint the contribution of the RMC as it -- or no longer RMC, really -- this is all CEMEX now.

Well, what it is true is that whereas a year ago we guided the market to single-digit growth for our existing portfolio before the acquisition of the RMC Group, and if you added what the consensus estimates were for the RMC Group at that time, you would have reached a level of about 3.3 to $3.4 billion in operating cash flow.

And of course, we have significantly exceeded that with the actual results. To a large extent, this is a result of the better-than-expected achievement of the synergies and cost savings in the RMC integration process, as well as, of course, the stronger-than-expected performance in some of our markets, such as the U.S., for example, which was also the biggest market for the RMC Group.

That's fine. That's understood. One final question for me, and it's just about pricing in Mexico. You've had a couple of years where prices have got up by less than the inflation, and the aim is to try and match inflation over time. Should we now think about you maybe trying to catch up those years that you may be -- it's gone up less than the inflation? Or is the aim in '06 still to match inflation?

Well, that is the idea. Now, again, with the -- measured in dollars, of course, it was slightly down a bit. But market conditions are dynamic and we will have to see. This is a long-term policy that we tried to implement that. But of course, it will depend on what market conditions are.

And of course, as you know, there are capacity expansions. They have effect on the market. Most of it has been absorbed without any major plant disruption over the past few years. So we would trust the market will still keep the same, but then again, this is an issue that goes around geographically in different ways. And so again, this is a long-term policy. We expect to hold it.

The positive surprise for 2005 for us in Mexico, as it regards your question, Mike, was the exchange rate. At the end of the year, the peso ended at close to 10.60 -- significantly stronger than we had expected at the beginning of year. Of course, always for planning purposes, we are cautious on our assumptions for the exchange rate. And again, we have been cautious for our assumptions for this 2006.

However, if one looks at the underlying fundamentals, Mexican inflation rates are close to U.S. inflation rates. Mexican external accounts are quite strong. In fact, Mexico's net external debt is actually zero or a net positive -- in other words, the reserves in Mexico exceed the external debt of Mexico at the public sector level.

And of course, we have fiscal prudence. We have strong capital inflows, both in remittances and the price of oil and everything else. And so when you look at it, it is fair to say that we may be, again, positively surprised with the exchange rate in the market in 2006 versus what we have assumed. And as Hector pointed out, in dollar terms, prices in Mexico have done reasonably well.

And what have you assumed for 2006 in the dividend peso/dollar exchange rate for the guidance?

We have more or less followed consensus, which is around 11.50. But of course, again, consensus has failed. We have failed in the past to predict the peso/dollar exchange rate.

I must say this is not the view of the treasury operation [at this time].

Vanessa Quiroga, Credit Suisse.

My question is just to request a little bit more detail regarding how you hedged the remaining options for your employees?

Rodrigo?

We decided, as we looked at the options we had to hedge, the exposure we had on the nondilutive executive stock option programs that remain outstanding, we decided that the best way to hedge that was to do it through a prepaid forward. And we allocated $145 million of the excess, the net proceeds of the $2 million we received, during the unwinding of the equity forwards, to that purpose.

We think the prepaid forwards -- in other words, we have in essence bought forward CEMEX stock for the benefit of the employees that realize a gain on the stock options. We think the amount that we have allocated to that, $145 million, at then-market prices back in the fourth quarter, should be sufficient to meet most, if not all, of our obligations going forward under these programs.

Because this is a prepaid forward, it is impossible for it to have a negative mark-to-market. It will always, by definition, have a positive mark-to-market, because the price of the stock can never be less than zero. And of course, the mark-to-market will always be the price of the stock times the number of underlying shares in the prepaid forwards.

And of course, you will continue with your program of trying to convert all of those compensations to restricted shares, right?

Well, I mean, this happens gradually, because many of these executive stock options do not have a forward conversion feature. And so it's up to the executives to decide when they want to exercise their options. And of course, they have up to eight years to do that. So this will be a gradual process. But we feel we have adequately hedged the exposure that remain on the nondilutive executive stock option programs.

Everardo Camacho, GBM.

Two quick questions. Could you give us an idea on how your fuel mix looks like now that RMC is consolidated? And the second question is considering your 4 billion EBITDA expectation for '06, could you share with us the breakdown of your 2.2 billion free cash flow expectation for the year?

Could you repeat the first part of the question, Everardo, please?

Yes, I am wondering how much pet coke and how much coal and natural gas is divided in your fuel mix in today's CEMEX?

I would say roughly we are around 45 to 50% pet coke, but a quarter coal, and a remaining mix of fuel oil, natural gas -- these are in other fuels. And then you have like around 10% of alternative fuels. So it's roughly half pet coke, a quarter coal, 15% between fuel oil, natural gas, diesel, and then around 10% alternative fuels for the fuel mix globally.

I am aware that you have a contract with Pemex that supplies pet coke at very competitive prices. Of this 45%, how much is actually under this contract?

That I would have to follow up with you, because I don't have the figure. But my sense is that it is better than half of it. So it's around 25% of the total fuel mix, more or less. But I can follow up, being more precise with you there.

Rodrigo, can you take up the --

Yes, on the 4 billion EBITDA guidance that we provided at the end of last year, we think we have been sufficiently cautious in providing that guidance. If you force me to tell you where are the upsides to that guidance, well, we talked about during this conference call, one of the assumptions we made is on the peso exchange rate. If the peso remains stronger longer, we think there is significant upside on this guidance number because of that.

We also, as we have done in the past, we assume that only a portion of the price increase in the U.S. is absorbed by the market. But of course last year, it was close to 100% of it, though, was absorbed in the market. And if the supply/demand dynamics remain tight, we could also have potential upside on that front.

And we had not assumed in this guidance number that the settlement would be reached between the Mexican and the U.S. authorities on the Mexican import tariff. And so there are some upsides that we will have to carefully monitored during the year in Mexico, the U.S. and elsewhere.

Now from that, we believe we can convert more than 55% of that operating cash flow, that EBITDA, into free cash flow after maintenance CapEx. We have consistently been able to generate more than 60%, and so again, we think we have been sufficiently cautious on that front.

And this I think speaks to the strong quality of earnings that our business model has delivered in the past and has allowed us to maintain a strong capital structure, a deleveraging capital structure, at the same time that we have been able to significantly enhance the profitable growth that we have delivered by complementing the higher organic growth that we have with growth through acquisitions. And so we intend to continue to do that going forward.

We don't expect any significant increases in any of the line items. We do expect lower interest expense, given the liability management initiatives that we have taken -- undertaken last year and the fact that we have significantly paid down debt. But that's where we are at this point for '06.

Thank you, Rodrigo. Very useful. But I'm actually looking for some numbers regarding CapEx or taxes or interest to try to reach this free cash flow you're guiding us to.

As soon as we are ready to provide that to the market, we will make it available.

Thank you, everyone. In closing, I would like to thank you all for your time and attention, your participation in this conference call. We look forward to your continuing participation in Cemex. And please feel free to contact us directly or visit our website at any time. Thank you and good day to all.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.